20140317-DBS_Group-Sino-Ocean_Land_DBS_Group_Research_._Equity_15页_268kb

Sino-Ocean Land (3377 HK) Report Summary - 17 March 2014

Core Content

This report provides an update on Sino-Ocean Land (3377 HK) and its financial performance for FY13, along with the analysts' outlook for FY14 and FY15. The company is primarily engaged in property development in China, with a strong focus on completions to drive revenue and improve asset turnover. The report also discusses potential synergies with key shareholders, particularly China Life, and the company's strategic initiatives.

Main Points

Company Overview

• Industry: Financials
• Sector: Real Estate Holding & Development
• Principal Business: China property development
• Market Cap: HK$28.185 billion / US$3.63 billion
• Major Shareholders:
  • China Life Insurance: 24.71%
  • Nan Fung: 14.05%
  • Wheelock: 7%
• Free Float: 54.24%
• Average Daily Volume: 5.3 million shares

Price Target and Recommendation

• Price Target (12-Month): HK$4.50 (down from HK$4.54)
• Recommendation: HOLD

Financial Highlights (FY13)

• Sales: RMB31,099 million
• Development Properties: RMB28,146 million
• Investment Properties: RMB550 million
• Others: RMB2,403 million
• Cost of Goods Sold: RMB23,552 million
• Gross Profit: RMB7,547 million
• SG&A Expenses: RMB1,460 million
• Operating Profit: RMB6,294 million
• Pretax Profit: RMB7,341 million
• Net Profit: RMB3,563 million
• Core Net Profit: RMB2,524 million
• EPS (RMB): 0.59
• Core EPS (RMB): 0.42
• DPS (RMB): 0.18
• Payout Ratio: 31%
• Net Debt/Equity: 0.4
• ROAE: 10.4%

FY14 Forecasts

• Sales Target: RMB40 billion (12% y-o-y growth)
• Saleable Resources: RMB73 billion
• Targeted Sell-Through Rate: 55%
• Gross Margin: Expected to remain at ~25% in FY14, with improvement from FY15 onwards
• SG&A as % of Presales: 4.1% (down from 5.8% in FY12)
• Net Profit: RMB4,015 million
• Core Net Profit: RMB3,300 million
• EPS (HK$): 0.58
• Core EPS (HK$): 0.56
• PE (X): 6.7 (FY14F)
• P/BV (X): 0.5
• Net Debt Ratio: Expected to be contained below 70% by end of FY14
• Cash on Hand: RMB16 billion
• Utilized Credit Facilities: RMB38 billion
• Total Financial Resources Available: Up to RMB54 billion

Strategic Initiatives

• Synergy with China Life: Signed an MOU with China Life for synergy extraction; potential introduction of Liu Hui into Sino-Ocean
• Asset Light Strategy: Exploration of a JV platform to cater to asset light strategy and China Life's demand for assets
• Land Acquisitions: Budgeted RMB30 billion (cash outflow ~RMB20 billion) for FY14
• Land Bank: 21 million square meters in 19 cities, average land cost RMB3.3k/sm
• Focus on Completions: Aim to improve asset turnover to 30% in FY14 (from 23% in FY13)
• Development in Key Cities: Beijing, Shanghai & Zhenjiang, Dalian, and Shenzhen account for ~80% of saleable resources
• Sales Target in Beijing: RMB11.5 billion

Market Position and Valuation

• Valuation Comparison:
  • PE (X): 6.7 (FY14F)
  • P/BV (X): 0.5
  • Discount to NAV: 57%
  • Tier 2 Average: 61% discount to NAV / 5.3x PE / 0.6x P/BV
• Valuation Trends:
  • PE (2007-2013): Average PE ranges from 4.8 to 5.9
  • PE Yield: 5.5 (FY14F)
  • Yield %: 6.8
  • ROE: 8.6 (FY14F)
  • ROE y: 9.7
  • NAV: 48%
  • Discount to NAV: 57.0%

Key Information

Potential Catalysts

• Visible support from China Life
• Synergies with Nan Fung Group
• Land acquisition opportunities in a tight credit environment

Analysts

• Ken HE CFA: +86 21 6888 3375 | ken_he@hk.dbsvickers.com
• Carol WU: +852 2863 8841 | carol_wu@hk.dbsvickers.com
• Danielle WANG CFA: +852 2820 4915 | danielle_wang@hk.dbsvickers.com
• Andy YEE: +852 2971 1773 | andy_yee@hk.dbsvickers.com

Outlook

• Management expects differential policies at the local level to continue
• Tightening liquidity may cap sector performance
• Higher-tiered cities may see lower volumes but higher ASPs, and vice versa in lower-tiered cities
• Continued focus on completions to drive revenue growth
• Expected to improve asset turnover and core net profit margin

Conclusion

Sino-Ocean Land is expected to benefit from synergies with China Life and Nan Fung, as well as a strategic focus on completions and asset turnover. While its financial performance in FY13 showed some challenges, the company has made progress in reducing SG&A costs. The analysts maintain a HOLD recommendation due to limited near-term catalysts and weak market sentiment, with a revised price target of HK$4.50. The current valuation appears fair relative to Tier 2 players.